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Should you charge an advance payment or not? Should you return the advance payment or not? When should you return it to guests, and when should you keep it? These are some of the most common questions many hosts regularly face, and in June 2020, when it was uncertain whether travelling would even be possible due to the pandemic, many did not know how to handle refunds of advance payments and charging new guests.
To make it easier for you to make this important decision, we have taken a closer look at this topic.
What is an advance payment and why is it good to charge it?
Some call it an advance payment, some a deposit, down payment, installment, or prepayment. In essence, it is a payment made in advance for, in this case, an overnight stay service that will be provided later.
Advance payment is usually charged when larger amounts are involved and when something needs to be done before providing a certain service, which requires time and money. In the case of renting accommodation, it is necessary to prepare the property, clean everything thoroughly, put on fresh bed linen, and maybe even replace something that was broken. Quite often, cleaners are also engaged at this stage and need to be paid.
So, time and money are invested in the preparation, and when the guest does not show up and has not paid an advance beforehand, the host suffers a loss. The advance payment is, to some extent, a guarantee for the host that the guest will come and that the remaining part of the booking amount can also be charged.
How to define charging and refunding the advance payment?
You have decided to charge an advance payment, but you do not know where to start. Start with clearly defined business terms.
Define:
The amount or percentage of the advance payment
Most commonly, 30% of the total booking amount is charged, but some charge 20% or even 50%.
The deadline for a full refund of the advance payment
Set a deadline within which it is possible to cancel the booking and receive the full amount of the paid advance. Usually this is at least 60 to 45 days before arrival.
The deadline for a partial refund of the advance payment
Define the deadline within which it is possible to cancel the booking and receive a partial amount of the paid advance, as well as what amount or percentage that is. Usually this is at least 44 to 30 days before arrival, and 20% or 30% of the advance payment amount.
The deadline within which you do not refund the advance payment
Set the period within which you do not refund the advance payment. Usually this is within 29 days before arrival.
The possibility of transferring the booking
Clearly state whether you allow the booking to be moved to the following year.
Extraordinary situations
If you refund the advance payment in extraordinary cases, specify what those cases are and how they are to be proven.
Should the advance payment be returned in extraordinary situations?
When the lockdown occurred in 2020, many people asked themselves this question. The properties were ready for the guests’ arrival, money had already been invested in them, but the guests were prevented from coming – flights were cancelled and many borders were closed. Many hosts found themselves caught off guard by an entirely new and unexpected situation and did not know what to answer when guests asked for the return of their advance payments, sometimes paid as much as a full year in advance.
It became common practice to first offer to transfer the booking to the following year, and if the guest insisted on a refund, to return the full amount. In this way, many hosts filled the 2021 season with bookings from the previous year before the 2020 season had even started.
Some hosts offered to keep the advance payment until the very day the guests were supposed to arrive and, if they still could not come, they would return the full amount. This practice also proved to be good and fair.
Those hosts who decided to keep the advance payment even though the guests had not cancelled through their own fault, but because of force majeure, became the target of negative comments and criticism on social media and in the media.
The pandemic taught us that, alongside regular cancellation terms, it is necessary to have terms that also apply to extraordinary situations.
However, what those situations are needs to be clearly defined. Closed borders, cancelled flights, illness, hospitalization, or death should be treated as extraordinary situations. Good host practice shows that in such situations they remain flexible and, while offering alternative solutions, ultimately return the paid advance to guests.
What should you do if you have to cancel the booking?
An extraordinary situation can also happen to you. Water leakage in the property, burglary, damage to property, hospitalization, death in the family, and similar events can all be reasons why you cannot receive guests. What should you do?
There are two possible solutions: offer alternative accommodation or cancel the booking.
In practice, it has been shown that guests are much more understanding when approached with an alternative solution. In fact, it is much easier for you to find alternative accommodation for them in your neighborhood than for them to do so from a distant country. The expectation is also that the alternative accommodation should be at the same level as yours and in your destination.
The second solution is cancelling the booking and returning the advance payment. This solution should be applied as a last resort. If you cancel through a portal, be sure to find out what portal penalties await you. If you cancel a direct booking received through your website, there are no penalties as long as you treat the guest fairly.
Also, do not be surprised if guests ask you for compensation equal to the advance payment they paid. In the case of a direct booking, you decide whether you will agree to this, but in the case of a booking through a portal, the portal often decides and may charge you a certain amount on the next booking.
How to arrange charging the advance payment for a direct booking?
When a guest wants to book directly through your website, it is important that before sending an inquiry they can find out what your business rules and cancellation policy are. In other words, it is important that your website clearly states what amount or percentage you charge as an advance payment and when, in what amount, or in what percentage you refund or retain it.
When a booking comes through your website, the assumption is that the guest has read your business terms and cancellation policy and agrees with them.
While in bookings through travel agencies or portals the advance payment is usually held by the intermediary until the overnight stay is realized, with direct bookings you organize the payment method yourself. This can be a bank transfer to your account, PayPal, card charge, and similar. It is good to offer the guest several payment options so that they can choose the one that suits them best financially, considering they may bear certain transaction costs.
The next step is sending a booking confirmation stating how much advance payment has been received and how much the guest pays upon arrival. The only thing left is to agree with the guest on the method of payment for the remaining booking amount – in cash upon arrival or by bank transfer before arrival.
Prepare your business rules
The beginning of the pandemic in 2020 showed how important it is to have defined business rules. Although back then we could not even imagine that such a situation could cause problems, today we can learn from that example.
Hosts who did not have clearly defined business terms found themselves in trouble when guests, for justified reasons such as illness or closed borders, decided to cancel their bookings, sometimes only a few days before arrival.
With clearly defined business terms, the guest knows what to expect, but you also have arguments for keeping the advance payment if the reason is not valid and the cancellation happened within the period in which you partially or fully retain the advance payment.
Do you want more flexible business operations?
Direct bookings through your website make that fully possible!
